PETALING JAYA: Sime Darby Plantation Bhd’s (SDP) latest third quarter of the financial year 2022 (3Q22) results missed expectations as prolonged labour shortage capped its upstream production amid rising costs, says Kenanga Research.
The planter posted a lower net profit of RM396mil, or 5.7 sen per share, in 3Q22 as compared with RM609mil, or 8.8 sen per share, for the corresponding quarter last year.
However, the group saw an increase of 6.5% in revenue to RM5.39bil in 3Q22 from RM5.06bil in 3Q21.
Kenanga Research in its latest report has downgraded SDP to “underperform” from “market perform”, with a lower target price (TP) of RM3.65 from RM4.40 previously.
“We are also revising downward the group’s core earnings per share (CEPS) by 19% in FY22 and 18% for FY23, respectively, due to higher costs from the combination of lower output and rising production costs.
“Our TP is based on FY23 CEPS at a historical integrated price-to-earnings ratio of 15 times,” it pointed out.
The group will also need time to fully implement all the new recruitment and management practices following the “forced labour” issue raised by the United States Customs and Border Protection agency in December 2020, coupled with those recommended by the Roundtable on Sustainable Palm Oil.
“Altogether, the group expects to resolve and stabilise its labour issue only in the first half of 2023,” noted Kenanga Research.
According to the research firm, edible oil demand typically rises at a rate of 3% to 4% per year.
However, unlike past seasons, demand in 2023 may register stronger than usual year-on-year growth despite a possible economic slowdown and recession in the US and Europe.
“For one, the spread of Covid-19 across the world dampened demand over 2020 and 2021 with some recovery seen in 2022, which we expect to continue into 2023,” Kenanga Research noted.
The research house expects crude palm oil (CPO) prices to stay firm, between RM3,500 and RM4,000 per tonne for the rest of 2022 and into 2023.
“The average CPO price forecasts of RM4,000 for 2022 and RM3,500 per tonne for FY23 are maintained, but the production costs for SDP are raised to RM3,000 per tonne from under RM2,500 per tonne,” it added.
Meanwhile, Hong Leong Investment Bank (HLIB) Research has tweaked its net profit forecasts on SDP lower by 2.7% and 19% for FY22 and FY23, mainly to reflect lower CPO price assumptions, a lower fresh fruit bunch yield assumption, and a higher margin assumption at the downstream segment.
However, it has raised the planter’s FY24 core net profit forecast by 17.7% to reflect higher earnings before interest and taxes (Ebit) margin assumptions at the downstream segment.
HLIB Research maintained its “hold” rating on SDP following earnings revisions, with a higher TP of RM4.49
“We consider SDP’s 3Q22 results within our expectations, accounting for 71.2% of our full-year estimate.
“Against consensus, the results came in below, accounting for only 64%,” it added.